Taxation of Investors and Investments Flashcards
(108 cards)
1
Q
What are the Income Tax Tables and Taxable Bands
A
Starting Rate of Savings 0% £0 - £5000
Basic Rate 20% £0 - £37 500
Higher Rate 40% £37 501 - £150 000
Additional Rate 45% Over £150 000
2
Q
What is the Income tax Personal Allowance
A
Personal Allowance born after 5 April 1948 - £12 500
Personal Allowance Income limit - £100 000
Blind person’s allowance - £2 450
3
Q
Married couples allowance
A
Over £100 000 reducing by £1 for every £2
4
Q
Taxation of Charities and exemptions
A
- Income and gains received are exempt, as long as income is used for charitable purposes.
- Exempt from paying stamp duty land tax
- Income taxed from trading if exceeds £85 000
5
Q
Taxation of Trusts
A
- Tax Rate for Trusts - 20%
- CGT Allowance - £6 000
- Allowance for Disabled
beneficiary - £12 000 - Entrepreneurs relief -
Lifetime £10 000 000 10% tax
rate
6
Q
Name the four types of Trusts
A
1) Trusts with an interest in
possession
2) Discretionary Trust
3) Accumulation and
maintenance Trust
4) Bare or absolute trust
7
Q
What is trusts with an interest in possession?
A
The beneficiary as the right to income from the trust or the right to the use of the property in the trust
8
Q
What is a Discretionary Trust
A
The trustees has power over the trust income and trust property
9
Q
What is an accumulation and maintenance trust
A
Income must be accumulated or used for the maintenance and education of a beneficiary till specified age not older than 25
10
Q
What is a Bare or Absolute trust?
A
Beneficiary has right to income and capital.
11
Q
What is the tax rate of the Trustees of a trust
A
Basic tax rate of 20% on income.
Dividend tax of 7.5%
12
Q
What is the tax rate of the beneficiaries of a trust
A
According to Income tax table
Basic tax rate - 20%
Higher tax rate - 40%
Additional tax rate - 45%
If trust income is dividends:
Basic tax rate - 7.5%
Higher tax rate - 32.5%
Additional tax rate - 38.1%
13
Q
Type of Investment Income
A
- Savings Income
- Dividend income
- Rental Income
14
Q
Tax rate on Savings income
A
- Starting & Basic tax rate -
20% - Additional Tax Rate - 40%
- Higher tax rate - 45%
15
Q
What is the Personal savings allowance
A
= Basic Tax Rate - £1 000
= Additional Tax Rate - £500
16
Q
What counts as Savings Income?
A
Interest from: - Bank and Building Societies - Credit unions / NS&I - Interest from UT's - Income from government or corporate bonds - Life annuity payments
17
Q
What is the dividend allowance for individuals?
A
2 000 Pounds
18
Q
The tax rates for Dividend income
A
- Income below basic Rate -
7.5% - Income between basic rate
and 150 000 Pounds -
32.5% - Income above 150 000 -
38.1%
19
Q
The investor’s net income is ?
A
Total rental income - total allowable expenses
20
Q
Does investors invested in OEICs, UT’s and ETF’s get taxed on their dividends?
A
Yes, those invested in shares will be taxed as dividend income, those invested in interest securities will be taxed as interest distribution
21
Q
How will investment Trust pay tax?
A
- On UK dividends the Investment Trust has no liability.
- Overseas dividends will be received net of foreign
withholding tax. - Corporation tax is applicable on all other income
received
22
Q
How will an investor in an Investment Trust pay Tax?
A
The Investor will pay tax on dividends as follows:
Basic Tax rate - 7.5%
Higher Tax Rate - 32.5%
Additional Tax Rate - 38.1%
23
Q
Real Estate Investment Trust tax
A
REIT’s need to pay away 90% of income
Dividends are taxed as property rental income
24
Q
Investors in a REIT tax
A
Pays income tax as follows:
Basic Tax Rate: 20%
Higher Tax Rate: 40%
Additional Tax Rate: 45%
25
Who pays National Insurance?
Employees and self employed people age 16 years and over.
26
What is the state pension age?
Age 65
27
What is the personal Income Tax Allowance
£12 500
28
Capital Gains Tax
Capital Gains Tax is tax paid on the capital gains made when an asset is disposed of.
29
The chargeable gain is:
Proceeds
- disposal cost
= Net proceeds
- allowable cost
30
Disposal cost
* valuation fees
* estate agency and legal fees
* advertising costs.
31
Allowable cost
* the original cost of acquiring the asset
* any incidental costs of acquiring the asset
* capital expenditure incurred in enhancing the asset
32
CGT for Individuals
-The difference between its acquisition
cost and disposal value is taxed as a capital gain.
- Individuals are liable for CGT on assets worldwide.
- Annual exemption of £ 12 000 per tax year
33
CGT for Trusts
- If settlor, spouse or child benefit from trust settlor is
liable for CGT
- Offshore Trust, the settlor is liable for CGT
- Tax rate of 20%
- Allowance: £ 6 000
34
Chargeable Assets
• shares in a company
• units in a unit trust or OEIC
• land and buildings
• higher-value jewellery, paintings, antiques and other
personal effects
• assets used in a business, such as goodwill
35
Assets that are exempt
• a UK-domiciled individual’s nominated main or principal
private residence (PPR)
• gilts and qualifying corporate bonds
• jewellery, paintings, antiques and other personal
effects that are individually worth £6,000 or less
• savings certificates and premium bonds
• assets held in an ISA, Junior ISA (JISA) or Child Trust
Fund (CTF)
• enterprise investment scheme (EIS), seed enterprise
investment scheme (SEIS) and venture
capital trust (VCT) investments
• betting, lottery or pools winnings
• personal injury compensation
• assets held in approved pension arrangements
36
Tax on OEIC's
• Capital gains within OEIC are exempt from tax.
• Capital gains made by taxpayer on disposal of OEIC
trigger a CGT liability if annual CGT exemption limit
was exceeded.
37
Tax on Investment Trust
• Investment trusts do not pay CGT on internal
gains.
• Investor will be liable for CGT on gains
38
CGT Calculation
Calculated CGT on disposal of a chargeable asset for a basic rate taxpayer.
Cost £10,000
Proceeds £25,500
```
Cost £10,000
Proceeds £25,500
Gain £15,500
Allowance £12,000
Taxable gain £3,500 (£15,500 – £12,000)
Tax £350 (£3,500 x 10%)
Proceeds net of tax £25,150
```
39
Inheritance Tax (IHT)
• IHT is primarily a tax on wealth
• Wealth that is left to someone else on its owner’s
death, also applies to gifts up to seven years before
death and to certain lifetime transfers of wealth.
• The amount which the taxpayer has transferred that is
taxed
40
Chargeable Transfers
* Gifts made during the lifetime of the donor
| * Gifts or transfers on death
41
Potentially Exempt Transfers (PETs)
• lifetime transfer individual to another individual is a
| potentially exempt transfer.
42
Transfers on Death
| Steps to be taken
Step 1 Look at seven years to death if any CLTs have
been made. If so, these
Transfers to use the nil-rate band available for
estate. Work out the value of any nil rate
band still available after this exercise.
Step 2 Calculate the gross value of estate
Step 3 Any part of estate covered by the nil-rate band is
not taxed. Any part estate in excess of the nil-rate
band is charged at 40%. Deduct any relevant
reliefs from the death tax.
Step 4 If relevant, divide the tax due between personal
representatives, the person in possession of
a gift subject to a reservation and trustees
43
The Nil-Rate Tax Band
0 - £325,000 of transfers is taxed at 0%
44
Residence Nil-Rate Tax Band
- 6 April 2017, a residence nil-rate band was introduced
| - The allowance £150,000
45
Exemptions and Reliefs
• Some exemptions apply to both lifetime transfers and
property passing on death.
• Other exemptions apply only to lifetime transfers
(including PETs becoming chargeable on death
within seven years).
46
Transfer of Unused Nil-Rate Band Between Spouses
* a married couple - £650 000
| * a single person - £325 000
47
Exemptions Applying to Lifetime Transfers Only (including PETs)
Small gifts exemption - £250 per donee each year to as
many donees
Annual exemption - 0 - £3,000
48
Gifts in consideration of marriage or civil partnership
exempt up to:
• £5,000 if from a parent of a party to the marriage or civil partnership
• £2,500 if from a grandparent or a remoter ancestor of one of the parties to the marriage or civil
partnership
• £1,000 if from any other person
49
Exemptions Applying to both Lifetime Transfers and Transfers on Death
• Transfers between spouses or civil partners are
exempt provided transferee is domiciled in the UK at
the time of transfer.
• applies whether or not the spouses or partners are
living together
• ceases to apply on divorce
• Transfers to charities are exempt
• If 10% of net estate is left to charity , lower rate of IHT
applies
50
Estate Administration
Laws of succession applies
51
Intestacy Rules
• a person dies without leaving a valid will
• Only married / civil partners and some other close
relatives can inherit
52
Intestacy - Married Couples and Civil Partners
• surviving issues - if there are children or predeceased
children
• Issue: • Surviving spouse / civil partner entitled to:
- statutory legacy of £250,000 which is index-
linked
- personal chattels
- half of the residue absolutely.
• Children entitled to remaining half of the
residuary estate at 18
• No issue • Surviving spouse / civil partner whole estate
53
Intestacy - Children – if there is no surviving married or civil partner
• inherit the whole estate
• 2 or more children - Estate gets divided between
them equally
54
Intestacy - no surviving married ,civil partner or children
• closer relatives inherit.
The order in which they inherit is:
• The parents of the deceased – equally if both living
• Brothers & sisters of the whole blood – equally or to
their issue if any have predeceased
• Brothers & sisters of half blood – equally or to their
issue if any have predeceased
• Grandparents – equally if more than one living
• Uncles and aunts of the whole blood – equally or to
their issue if any have predeceased
• Uncles and aunts of half blood – equally or to their
issue if any have predeceased
• If there are no surviving relatives, the estate passes to
the Crown, the Duchy of Lancaster or the
Duchy of Cornwall. When this happens, it is known as
bona vacantia.
55
Bona Vacantia process
• Government Legal Department advertises the estates
of deceased persons
• No heirs - Assets are realised and transferred to HM
Treasury. net value exceeds £500
• Cornwall and Lancashire - assets legally pass to
respective duchies ,
• Duchies donates to charities
56
Residency and Domicile
An individual’s tax position in the UK will be determined using the statutory residence test and is based
on the following:
* The Automatic Overseas Test.
* The Automatic Residence Test.
* The Sufficient Ties Test.
57
The Automatic Overseas Test
An individual is deemed to be non-UK resident for tax if
criteria are met:
• Not present in the UK for previous 3 tax years, and not
present in the UK for less than 46 days during
current tax year.
• Resident in one or more of the previous 3 tax years,
and present in the UK for less than 16 days.
• They work overseas full-time, & work in UK for no
more than 30 days, & spend no more than 90 days in
the UK.
58
The Automatic Residence Test
Individual are deemed to be UK resident for
tax if following criteria are met:
• Spend at least 183 days in the UK in a tax year.
• Only home / main home is in the UK
• They work full-time in the UK for 365 days.
59
The Sufficient Ties Test
Is looking at the amount of ties an individual has in the UK.
The ties are:
• Family tie - Spouse, civil partner, minor children in UK
• Accommodation tie - Accessible accommodation in the
UK,use for a continuous period of at least 91 days in a
tax year
• Work tie - has a work tie if, they work for more than 3
hours a day for 40 days per tax year. Employed / self -
employed.
• 90 day tie - spent 90 days in the UK in either of the last
two tax years.
• Country tie - spend more days in UK in a tax year than
in any other single country
60
The Tax Implications of Residence and Domicile
UK Resident:
- You pay UK tax on all income as it arises and gains as
it accrue
- It is possible to be a resident in the UK but not a tax
resident.
- You can be taxed on worldwide income and claim
under the Double taxation agreement.
61
Domicile is:
the country someone treats as permanent home
62
four types of domicile
1. Domicile of origin
2. Domicile of choice
3. Domicile of dependency
4. Deemed domicile
63
Foreign Account Tax Compliance Act
is a US law designed to combat tax evasion by US
| persons
64
Common Reporting Standard
- the implementation of a global standard for the
annual cross-border exchange of information on
financial accounts.
- aims to combat tax evasion.
- is broadly based
65
Stamp Duty and Stamp Duty Reserve Tax on Securities
Stamp Duty Reserve Tax (SDRT) are:
* taxes paid on the purchase of certain securities
* is payable when the transfer is effected electronically
Stamp Duty is:
* the tax payable when there is some paper-based
transfer
66
Stamp Duty and Stamp Duty Reserve Tax on Company Shares
• Stamp duty applies for a paper transaction - It is 0.5%
of the consideration value. Rounded to nearest £5
• SDRT is a paperless transaction - It is 0.5% of value of
purchase. Rounded to nearest penny.
67
Units in Unit Trusts and Shares in OEICs
- No stamp duty or SDRT charged to the buyer of Unit
Trusts
- Unit trust or OEIC pays SDRT on the underlying shares
in which it invests.
68
Government Bonds
no stamp duty or SDRT on government bonds
69
Corporate Bonds
- no stamp duty or SDRT on corporate bonds
- there is stamp duty or SDRT on convertible loan
stocks
70
Exchange-Traded Funds (ETFs)
No Stamp duty is payable on purchase of exchange-traded funds (ETFs).
71
Property
- No stamp duty or SDRT on the purchase of property , - Stamp duty land tax (SDLT). The tax is due on the
purchase of a direct holding property.
72
Stamp Duty Land Tax on Property
is payable by the purchaser on purchases of land and property in the UK
Purchase Price, Lease Premium or Transfer Value
£ 0 - £125,000 0%
£125,001 to £250,000) 2%
£250,001 to £925,000) 5%
£925,001 to £1,500,000 10%
£1,500,001 + 12%
Corporate bodies (with effect from 20 March 2014) £500,000 + 15%
73
Higher Rates for Additional Properties
individuals pay 3% on on top of SDLT if they own more than one property.
74
Value Added Tax (VAT)
• (VAT) is a tax that is charged on most goods and
services
• It’s also charged on goods and services that are
imported outside the EU
• standard – 20%
• reduced – 5%
• zero – 0%.
• There are also some goods and services that are:
• exempt from VAT
• outside the UK VAT system altogether.
75
Exempt Items
* insurance
* providing credit
* education and training, Conditions apply
* fundraising events by charities, Conditions apply
* membership subscriptions, Conditions apply
* most services provided by doctors and dentists.
76
zero-rated goods
* count as taxable supplies
| * VAT rate is 0%.
77
goods or services are sold that are exempt
- are not taxable supplies
| - VAT on expenses cannot be reclaimed
78
Corporation Tax
- by limited companies, based on profits
- sole traders (the self-employed), taxed on their
earnings as income
Different Rates
2019–20 2020–21
Main rate on profits 19% 17%
UT's & OEICs 20% 20%
Capital Allowances
– a form of tax allowance on certain purchases or
expenses.
- plant & machinery, buildings, and research &
development
79
Taxation of Franked Income
Franked income is free of further tax to the receiving company.
80
Legal Requirements Relating to Confidentiality and
| Disclosure
- Confidential of client should not be disclosed to 3rd
parties
- FA could have disclosure obligations to legislation
81
Basic Investment Tax Planning
- tax avoidance / tax mitigation is legal
| - Tax evasion is illegal
82
Allowances
Spouse or Partner’s Personal Allowance
• Married couple / civil partners taxed separate
people.
• When spouses / civil partners own income-
generating property jointly, equal shares of the
income.
• income-yielding assets can be transferred to
spouse / partner with lower marginal tax rate.
83
Pension Contributions
The annual allowance £40,000
84
Life Assurance Bonds
- Is a combination insurance protection with
investment exposure and tax-efficiency.
- 5% of the value of policy is allowed to be taken on an
annual basis, to spend as income, while it is treated as
return on capital, not taxed as income in investors
hands on withdrawal.
85
Criteria for Selecting a Tax-Planning Strategy
• after-tax returns from investments can be affected by
tax rules
• taxation should therefore be considered when
choosing investments.
86
A UK resident rents out a room in their own home and receives £4,000 p.a. from the
tenant. What personal tax do they have to pay?
No tax is payable as the income is below the threshold
87
Norman made the following share purchases.
1,600 shares in ABC plc at £3.60 each (using a stock transfer form).
1,800 shares in XYZ plc at £2.80 each (settled through CREST).
In both cases he paid the true market value. What is the TOTAL stamp duty / stamp duty reserve tax liability on these two purchases?
£ 55.20
88
Which of the following will pay the HIGHEST amount of SDLT on the relevant transaction?
Company A, purchasing a residential property for £600,000
89
In which scenario would a chargeable lifetime transfer arise?
A parent establishes a discretionary trust in favour of his children into which he transfers £350,000
90
In April 2016 Jenny invested £40,000 making individual £10,000 investments in an unlisted company, premium bonds, an antique watch and a rental property?
If she made a disposal in April 2018, which of these investments would not be liable for
capital gains tax? The:
premium bonds
91
Three investors are resident in the UK for tax purposes and each received income from overseas net of withholding tax.
Investor A holds UK domicile status and received a one-off payment from overseas.
Investor B holds Greek domicile status and received a series of monthly payments from overseas.
Investor C holds US domicile status and received a payment in respect of an overseas investment, but Investor C is not the true beneficiary of this investment.
Based solely on this information, which of the following statements is TRUE?
All three may be able to reclaim some of the deducted tax, depending on the overseas country involved
92
Three friends receive rental income.
Andrea rents out the spare bedroom in her two bedroom house, for which she receives gross rental income of £320 per calendar month.
Amanda rents out her two bedroom flat while working abroad on a two year contract, for which she receives gross rental income of £640 per calendar month.
Tanya rents out the three bedroom house she inherited from her late mother, for which she receives gross rental income of £960 per calendar month.
In relation to the tax treatment of this income, and based solely on this data, it is reasonable to deduce that:
only Amanda and Tanya could benefit by claiming property-related expenses
93
James and Emily are UK domiciled tax payers. They live in England and have two dependent children. Several years ago they divorced, but Emily has recently remarried and has custody of their daughter. James has not remarried but has custody of their son. James has an estate valued at £1.2 million and Emily`s estate is valued at £250,000. While Emily`s new husband is alive, what will each child inherit if both James and Emily suddenly died without a valid will?
Both children will receive £600,000 as an inheritance
94
How much capital gains tax would a higher rate tax payer pay on a share disposal that generated a £20,000 profit?
£1,660
95
A financial adviser is dealing with two clients.
Client A mentions, during his fact find, that he undertakes some regular lucrative weekend work and is paid in cash, which he knows, strictly speaking, he should declare to the tax man, but has chosen not to do so.
Client B mentions, during her fact find, that she does not want to declare all her different savings accounts in the assets section of the form because she only requires advice on her protection needs.
Which of the following statements is TRUE?
Only Client A`s case should be referred to the Money Laundering Reporting Officer
96
Bill sets up a discretionary trust in favour of his three grandchildren only with a £500,000 lump sum.
How will this be treated in respect of Bills IHT position? Bill has made no other gifts previously
The transfer is a chargeable lifetime transfer and will attract an immediate IHT charge on the portion and above Bill's IHT allowance
97
If an investor is UK resident but non-domiciled, which asset would be liable to IHT?
An investment Trust quoted on the London Stock Exchange
98
An adviser is considering the transfer of shares from a client to his spouse. John has already established gains of £10,000 so far this year and has carried forward losses of £10,000. His wife Janet has no investments in her own right.
Why would this strategy be considered?
Chargeable gains and losses on subsequent disposals will be calculated based on the original costs
99
What term is used to describe the person who places property in trust for the benefit of another?
the settlor
100
Describe the four main types of trust
1. Interest in possession – where beneficiaries has, for the time being, a right to the trust income as it arises or to the use or enjoyment of the trust property.
2. Discretionary trusts – where the trustees generally have wide powers over the application of both
the trust income and the trust capital.
3. Accumulation and maintenance trusts – where one or more of the beneficiaries must become entitled either to the trust income or to the trust capital absolutely by a specified age not exceeding 25. Until then the income must be accumulated or applied for the maintenance, education or benefit of the beneficiary.
4. Bare or absolute trusts – where the beneficiary has an immediate and absolute right to both capital and income, which cannot be taken away.
101
At what rate is dividend income currently taxed in the UK?
individuals do not have to pay tax on the first £2,000 of their dividend income,
Dividend income falling below the basic rate tax limit 7.5%
Dividend income over the basic rate tax limit and below £150,000 32.5%
Dividend income above £150,000 38.1%
102
How are the equalisation payments treated for tax purposes?
When an investor first buys units or shares in a fund, they may receive an equalisation payment as
part of the next distribution that the fund pays. This equalisation payment is treated differently for tax
purposes.
When an investor buys units, the price is based on the net asset value (NAV) of the fund, that is, the value of the underlying portfolio plus any income that has been received but not yet paid out. When the next distribution is made, therefore, a part of the distribution that the investor will receive includes this income that they have paid for in the purchase price. It is effectively a return of part of the amount invested, and so is treated differently for tax purposes.
When the distribution is paid, the investor will receive a tax voucher that splits the payment into two
parts: the normal distribution and the equalisation payment. As the equalisation payment is a return of
the investor’s money, it is not liable to income tax. Instead, as it is a return of the amount invested, the
payment can be deducted from the cost of the holding when calculating any chargeable gain on an
eventual disposal.
103
What class of National Insurance contributions (NICs) do employees pay?
Class 1 primary - employees’ contributions
Class 1 secondary ( employees earning above the earnings threshold)
Primary earning £ 118 - £ 962
Primary Threshold £ 166
Secondary Threshold £ 166
Primary Class rate between lower and upper earnings 12%
Primary class rate above upper earnings 2%
104
When considering National Insurance contributions (NICs), what is the primary threshold?
It is possible to earn up to £166 a week (2019–20) before paying any NICs. This is known as the primary
threshold. However, as long as earnings are greater than £118 a week (2019–20), it is still possible to
build an entitlement to state pension and certain other benefits. This is known as the lower earnings limit.
105
What is the typical annual capital gains tax exemption for a trust?
There are some exceptions to the rule that liability for CGT falls on the trustees – for example:
• if the settlor, settlor’s spouse or civil partner, minor
child or stepchild can benefit from the trust, then
it is the settlor who is liable
• if the trust is an offshore trust, any gains may fall to the
settlor.
Gains of trustees are taxed at the tax rates applicable for trusts, which changed in April 2016 to 20%.
Trusts have an annual CGT exemption which depends on the type of trust in question. For personal
representatives of deceased persons and trustees of certain settlements for the disabled it is £12,000; for
most others, it is £6,000 – ie, half the level for individuals of £12,000.
106
How is a transfer of capital made during a settlor’s lifetime to a discretionary trust treated for inheritance tax (IRT) purposes?
A lifetime transfer made by an individual to another individual is known as a potentially exempt transfer
(PET). A PET is treated as being exempt from IHT when made – and will remain so providing that the
transferor survives for at least seven years after the date on which they make the gift. If the transferor
dies within seven years of making the gift, it will become chargeable to IHT.
A lifetime transfer to a discretionary trust is a chargeable lifetime transfer (CLT). A CLT is a transfer that is immediately chargeable to IHT at half the lifetime rate, ie, 20%.
107
What is the ‘quarter up’ rule?
IHT valuations are done on the basis of the ‘quarter up rule’, taking the bid (lower) price plus a quarter of the
difference between it and the offer price. Thus, if the closing price for a particular day is 300–304p, the
IHT valuation is 300 + (304 – 300)/4 = 301p.
108
What rate of stamp duty is payable on the purchase of exchange-traded funds (ETFs)?
Stamp duty is not payable on the purchase of exchange-traded funds (ETFs).
